Thank you for standing by. At this time, I would like to welcome everyone to the Primoris Services Corporation Third Quarter 2022 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Blake Holcomb, Vice President, Investor Relations, you may begin your conference.

Good morning and welcome to the Primoris third quarter 2022 earnings conference call. Joining me today with prepared comments are Tom McCormick, President and Chief Executive Officer; and Ken Dodgen, Executive Vice President and Chief Financial Officer. Before we begin, I would like to make everyone aware of certain language contained in our safe harbor statement. The company cautions that certain statements made during this call are forward-looking and are subject to various risks and uncertainties. Actual results may differ materially from our projections and expectations. These risks and uncertainties are discussed in our reports filed with the SEC. Our forward-looking statements represent our outlook only as of today. We disclaim any obligation to update these statements except as required by law. In addition, during this conference call, we will make reference to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures are available on the Investors section of our website in our third quarter 2022 earnings press release, which was issued yesterday afternoon. I'd like to now turn the call over to Tom McCormick.

Thank you, Blake. Good morning and thank you for joining us today to discuss our third quarter results and our business outlook for the remainder of 2022 and going into 2023. The third quarter results for Primoris showed solid execution, the overall strength of our market position as we set new records for both revenue and backlog. The strong quarter was a fundamental driver of progress in our 2022 year-to-date results. Revenue year-to-date is up over 18% from 2021 and organic revenue growth is up approximately 12%. This is impressive growth given the significant headwinds we are facing this year in our Pipeline Services segment. Despite some continued headwinds from both the Pipeline segment and inflation across the board, gross profit was up almost 22% from the third quarter of last year and up 68% from the second quarter of 2022 as we benefited from higher revenues and rate increases that we negotiated with a number of our key clients to ease some of the inflationary pressures. Similarly, our backlog has roughly doubled from the third quarter of last year to $5.5 billion, of which, nearly 8% is organic growth from our Utilities and Energy/Renewables segments. We have also achieved the highest level of backlog in our Pipeline Services segment since the second quarter of 2020. We recently announced another $400 million of awarded projects in our Energy/Renewables segment across our solar, power and heavy civil businesses that are not reflected in these totals. We will begin working on a number of these projects during the fourth quarter and expect that our backlog will continue to gain momentum as we close out the year to position us for a strong 2023. With that, I'll provide some commentary on each of our segments. Beginning with Utilities, we delivered margin recovery in…

Thanks, Tom, and good morning, everyone. I'll begin with our key operating metrics for the quarter, followed by our balance sheet, cash flows and backlog, and I'll end with our guidance. As Tom mentioned, our third quarter revenue was a record for Primoris, reaching approximately $1.3 billion, a new record for the second consecutive quarter, and an increase of $371 million or 41% compared to the prior year and an increase of $261 million or 26% from the second quarter of 2022. This is driven by continued strength in our growth markets, including solar, communications and power delivery, partially offset by weakness in Pipeline Services. Our Utilities segment increased $158 million or 34.8%, primarily driven by increased revenues with existing customers in power delivery, contributions from new PLH customers and expansion of our communications business. Energy/Renewables revenue grew by $249 million or 71.1% primarily due to solar revenue that increased almost 100% and healthy growth in our industrials business. Pipeline Services revenue decreased by $37 million from last year due to continued challenges in the midstream sector that has led to fewer projects moving forward and are being more selective in the customers we work with and the projects we bid. Gross profit for the third quarter was almost $155 million, an increase of $27 million from the prior year, driven primarily by strong contributions from solar, improved industrial's profitability and the addition of PLH and B Comm, partially offset by the decline in pipeline. Gross profit as a percentage of revenue was 12.1% for the quarter compared to 14% in the prior year. This is primarily due to challenges in the Pipeline segment and slightly lower utility margins, partially offset by better Energy/Renewables margins. Now let's look at each of the three segments. In our Utilities segment, gross profit…

Before we open the call for questions, I want to reiterate three key points from today's call. First, we are seeing tremendous success growing our business, both inorganically through acquisitions and organically through footprint expansion and positioning ourselves well in markets that are poised for secular growth. Second, we are focused on not just growing revenue, but growing profitably. We are placing emphasis on continuing to reduce project costs while delivering quality services to the right customers in the right markets. And third, we are operating in an economic backdrop with uncertainty around supply chain, rising interest rates and inflation. However, we are working to mitigate these impacts on our business by stocking materials when prudent, manufacturing our own components, working with vendors and customers on pricing and using free cash flow to manage our debt levels to allow for future growth and value creation for our shareholders. We'll now turn it over for questions.

[Operator Instructions] Your first question is from Lee Jagoda of CJS. Please go ahead. Your line is open.

Yes, good morning, it's Peter Lucas for Lee. Can you talk a little bit about the dynamics you saw around Hurricane Ian cleanup in Florida and how much of a benefit to revenue and margin that could be in Q4 and is this factored into your Q4 margin range for utility?

Yes. It wasn't -- again, we mobilized approximately 700 employees to Florida to help reestablish power delivered to all of our clients. But it wasn't -- you'll see that reflected in our Q4 numbers, but it was just a small part of those numbers. And yes, it's in our forecast.

Helpful. Thanks. And how should we think about sequential revenue growth, particularly in the Energy segment, given a lot of this work should be less seasonal than some of your other work has been historically?

Yes. We're expecting Q4 Energy/Renewables revenue to be up slightly, maybe about 5% to 10% in Q4 from Q3.

Perfect. Very helpful. I'll jump back in the queue. Thanks.

Your next question is from Adam Thalhimer of Thompson Davis. Please go ahead. Your line is open.

Hey, good morning guys, congrats on a good quarter. Can you talk a little bit about the bidding environment for solar and your outlook there for 2023?

Yes, Adam, I can. It's actually -- we're looking at now for -- it's hard to just box this into 2023, but we have a portfolio of projects that were either under contract or have been -- or in LNTP for or are pursuing in different stages of either sole source, shortlisted or bidding of $8 billion. So those projects will start execution anywhere from -- some of them are already in the field, some of them are in engineering, some of them will start in 2023 and some of them will finish as far out as 2027.

Got it. And then a similar question on the Pipeline side. And you talked about this in your prepared remarks in terms of the awards were better in Q3, the bidding is better. I guess the question is kind of what's driving that in your mind, how sustainable that is? And I always get the question from clients like can this stuff actually get built in today's regulatory environment?

Well, you're not going to see any cross-country pipelines get built in today's regulatory environment. You're seeing that in political climate right now, with all the voting going on midterms. But a lot of this is not is -- it's intrastate, so it's just getting it from West Texas to the processing facilities or the LNG facilities. Some of it is water. We have clients who are in the middle of design for a client on carbon capture project. And we have clients looking in hydrogen projects. So there is -- there are projects out there. You're just not -- you're not going to see a keystone unless something changes with the government -- with the regulatory process.

I'll turn it over. Thanks, guys.

Your next question is from Jerry Revich of Goldman Sachs. Please go ahead. Your line is open.

Yes. Hi, good morning, everyone. Really excellent performance this quarter I'm wondering, can you just expand on your comments on the pull forward that you mentioned into the third quarter, what drives the view that it's pull forward versus an uptick in demand, have you seen a drop off in October and November, it did, but can you just expand on that point?

Yes, Jerry. We have a little bit of project revenue that got pulled forward and they got completed faster than we expected. And this impacted a little bit of our Utilities segment and also a little bit of Energy/Renewables segment, mostly industrial projects actually. So sequentially, I would expect Q4 revenue to be down slightly from Q3 in Utilities. But despite that pull forward, I would expect Energy/Renewables revenue to be up slightly sequentially.

Great work. It's been a while since we heard something completed ahead of plan. That's great. And can we just expand on the discussion around renewables? You folks had an excellent ramp-up continuing over the course of this year. And I think if I heard your comments right, you're expecting much slower sequential growth in the fourth quarter. Can you just expand on that? Because I think you were up about 25% sequentially in the third quarter. It feels like you had good momentum. Can you just expand on what's driving the slowdown in that ramp from the strong really 3Q and also 2Q levels that we saw?

Yes. I think, Jerry, if you look back over the course of this year, the quarterly sequential growth has been a little lumpy, and it all really just depends on the timing of new projects starting relative to older projects finishing or existing projects finishing as well as the availability of crews, as we've talked before about the new crews that we're training. They're coming online and expand our capacity and capability to execute on projects. Crews came online in Q3, which drove some of that sequential expansion. I don't think we have any that are coming online in Q4. Next two crews won't be available until sometime in 2023.

Well, some of it's just how projects accelerate from going from the engineering phase to the field also, and you'll see revenue burn at a higher rate when you do that. So it just really depends on what stage each of the projects are and when they're awarded, when they go from LNTP to award to the field. So that drives a lot of it too and that can make it lumpy.

I appreciate the discussion. Thanks.

Your next question is from Sean Eastman of KeyBanc Capital Markets. Please go ahead. Your line is open.

Hi guys, nice update here. I guess really the one thing I would poke at is the cash flow, I suppose some working capital build isn't particularly surprising given the elevated revenue print, but we definitely want to start seeing some cash flow. So could you talk about what we're going to see in the fourth quarter, how much debt you think you can pay down in 2023, that would be really helpful.

Yes, Sean. Q4 operating cash flow, Q4 is when some of this -- some of the seasonality of our business normally starts to turn. But at the same time, we've got our Renewables business continuing to grow sequentially as we go into Q4. So Q4 is going to be a mixed bag. It's going to be very interesting to watch. I think we're going to have a slightly positive Q4, excuse me. I think we'll have a slightly positive Q4. And then actually Q1 will probably be more where we're going to see the flip in turn in cash flow from operations. And then what was your question on '23?

How fast you can pay down debt.

How fast you can pay down debt. We're actually working on '23 plans and forecast right now so I don't have a good answer for you yet. I probably will at the next quarter, at year-end in February where we're going to talk.

Okay, fair enough. Hopefully, we're calling you Ken cash next year.

Exactly.

All right. And then on the Pipeline segment underabsorption element, I mean, are we going to be kind of hanging out here in the low to mid-single-digit margin for the next few quarters? I'm just wondering how much revenue needs to kind of layer back into the system to get back into that higher single-digit to low double-digit sort of normative range we've seen historically? How should we think about that?

Yes. So we're expecting a sequential tick-up in Q4 in revenue, which will drive some of that absorption. We were hoping to cut some of that segment fixed cost in Q3. We just couldn't offload it as fast as we wanted to, so we're going to be doing a little bit in Q4. So obviously, we should be able to get back up to normalized margins if we can just get revenue for the quarter up to about $100 million. It's amazing how much that -- the segment fixed cost will turn just with that incremental $20 million to $30 million of revenue.

Yes, they're not carrying that much overhead in the segment. That's right.

Okay, that's helpful. And then one last one. Just around the solar supply chain challenges. I mean, obviously, the bookings there are super strong. The pipeline there is super strong. But I'm just wondering how good of a line of sight you guys have on a lot of that newer work breaking ground. And it seems like this re-sequencing element is kind of keeping production flowing now, but could we end up with a bit of an air pocket in the first part of next year as we work through these kind of lingering supply chain issues? And one of your competitors was talking about a bit of a recalibration and planning around the IRA. Just kind of curious how you're thinking through that.

Yes. I think everybody is still evaluating the IRA. So we -- it's almost like a chess game for us, even just moving crews. We've been working with our clients that have surety of supply and moving crews from projects that we may have been delayed because their supply has moved out. Two projects where clients have some more surety and been able to move those project teams over. And so it has helped us to keep a pretty high utilization of our project teams. And still the philosophy has been build the project out as much as you can and then you can move away from that project to mobilize on a new project, send a smaller contingent of crews back to install the modules when they're there. That's working for some of our clients. For other clients, they haven't wanted to do that because then they've got a facility that's not operating. And so they kind of pushed their schedules out, which has actually helped us a little bit because then we've been able to move those teams to other projects. But it is a chess game for sure. It takes a lot of collaboration between us and our clients.

Okay, great. I appreciate the help. I'll turn it over.

Your next question is from Brent Feldman of D.A. Davidson. Please go ahead. Your line is open.

Hey, thanks, good morning, guys. Just back on the Energy segment, all the things you're doing in solar in [indiscernible], the other stuff going on in there. But can you just talk about what you're seeing on the LNG and maybe industrial opportunities within that business?

Yes. Brent, it's interesting in both the union and nonunion markets, we're seeing a lot more activity just in opportunities for smaller cap projects. Haven't seen anything with real big LNG trains. Of course, we don't chase those or big hydrocrackers, really nothing in refining at all. But we are seeing a lot of movement with respect to some of the other light industrial markets, both out West and along the Gulf Coast. And we've been -- because we are at that group, especially our nonunion group is performing so well, we're actually seeing repeat business. And we're seeing some -- actually opportunities in gas power generation Ken just reminded me of. So it's a mixed bag. So they're not real big projects but there's a fairly large number of them. Because of the performance of our teams, we've been able to -- and we've been able to be successful in winning that work.

Okay, okay I appreciate that. And then the numbers coming out of the communications business, I know it's relatively smaller but pretty eye-catching. Tom, wonder if you can kind of parse out what's been sort of this focus on market share gains versus strength in wireline and what are you seeing there?

Sorry, Brent, I want to make sure, was that on communications? I couldn't hear you very well.

Yes, sorry. communications.

Yes. It's actually been a combination. So the market is clearly growing. We've been growing with our customers. And I don't know if we've taken much market share, but maybe in certain markets, we might have taken a little bit of share. It's hard to measure that.

Well, we have grown that communications business. It was basically Texas-based. They're operating in Louisiana, Alabama, Mississippi, Georgia, Florida, Arizona. We've moved into some new markets out in the Denver, in Utah, in Mid-Atlantic regions also. So albeit small but there are opportunities for us out there, and we're winning our share of the work.

Okay. Thanks, guys.

Your next question is from Julio Romero of Sidoti. Please go ahead. Your line is open.

Hey, good morning. I was hoping to dig in more on the effect of the availability of solar modules. You mentioned what you're doing to kind of flex labor up to the point of module inflation. How does that affect utilization? I would assume that would be a negative or maybe I'm wrong. And if it is a negative utilization, are you guys able to kind of pass on in any rate increases to mitigate that?

Well, we don't build on rates, right? These are lump sum jobs. So the clients pay for the demobilization of the crews and the remobilization of the small or contingent crews to come back and reinstall the modules. So yes, you're right. It affects utilization on the crews and the project team. But we -- when you can move them and you're getting compensated for the clients and they've been very open and receptive to doing that.

Okay. Because it just sounds like there's a lot of variability of like timing of when kind of panel supply will alleviate in maybe second half of '23. I'm just curious how you guys and your customers are kind of working around that. Are you kind of taking a shared approach to it, I guess?

Well, what we've seen is we've seen clients that we've been executing projects for on a consistent basis over the past couple of years kind of see a pause because they don't have the surety of supply and other clients that we've done some projects for but have wanted us to do more but they have surety of delivery. We've actually picked up more of their work. So we're doing a lot of work for some clients now and will do into 2023 that we may have done one or two projects for in the past when we were successful, and they wanted us to build our crews up for them, but we were just weren't able to and now those crews are available.

Okay. And could you talk a little bit more about the Inflation Reduction Act and the impact on the solar business? You talked about some of the incentives that Primoris can benefit from. I assume your customers get incentives too. Just how does that benefit? I assume there's probably some moving parts, but how does that benefit the value chain and maybe mitigating the cost of capital when folks are thinking about paying for some of these projects?

Well, I mean, I've heard our clients will liken it to putting the solar business on steroids. They're still evaluating what's in the act and how they might benefit from them as are we, so it's a little early to be able to tell you.

Okay. I appreciate you taking my questions.

[Operator Instructions] Your next question is from Avi Jaroslawicz of UBS. Please go ahead. Your line is open.

Hey, thanks for taking my questions. So looking at the backlog, it looks like you have close to $2 billion of non-solar backlog in the Renewables segment. So just kind of do you expect to burn more of that over the next 6 to 9 months and from the solar backlog? Or should burn be relatively similar to backlog mix that currently stands? And also, can you remind us some of the margin dynamics of the non-solar parts of the business? Are they significantly different than solar part?

Yeah, Avi, good question. So on the backlog. What is solar industrial projects that Tom has talked about a little bit earlier about some of the industrial projects that we're seeing working on right now? Most of those projects were born less than a year and then the balance of it is our heavy civil business and most of those projects are longer-term projects that will burn over anywhere from probably a year to a year and a half on the short end. Our longest project right now is probably at four years left to burn. So it's a pretty broad range depending on the type of business. And then margins, our industrial margins are actually very consistent with our solar margins right now, especially, with a strong performance this year. By default heavy civil margins are less, our civil margins junior one gross margins junior one 7% to 8% range versus the rest of the segments which are kind of 10% to 12%, 12% to 13%.

Got it. Okay, that's helpful. And then in terms of margins in the Utilities business, so it sounded in your comments like still not quite covering all the increased costs in that business pricing. So I was just wondering if you could discuss some of the dynamics there. Has there been more pushback on pricing than expected or maybe costs continued to accelerate in the quarter?

Well, you saw the benefit of the negotiations that took place earlier in the year, certainly in the first and second quarter on what they -- the effect it had on our numbers in the third. We expect -- we're still negotiating with some clients, and we have some clients that have MSAs that are renewing at the end of the year or towards the end of the year that wanted to wait and negotiate those rates then. So we'll see. It's going to be less of an impact on, I guess, a positive or negative, really on the balance of the year. But there are also clients that don't want to talk or don't want -- aren't willing to negotiate. We'll move away from them. We have moved away from some of those. So again, there's going to be some positive upsides to those negotiations at the end of the year, but it won't be as significant as what you saw between the second and the third quarters.

Okay, got it. I appreciate the color. Thanks for the time.

There are no further questions at this time. I will now turn the call over to Tom McCormick for closing remarks.

Thank you, operator. In closing, we are optimistic about the future of Primoris. We have great businesses with strong leadership that lead us to prioritize serving their customers through quality execution and reducing contract risks, we are working to increase our exposure to markets with multi-year investment tailwinds both organically and inorganically while generating consistent cash flow in our mature markets to fund this investment and create long-term shareholder value. I want to thank all of our employees for continuing to work safely and for all their hard work and dedication in meeting our customer's needs. Thank you again for joining us this morning and for your interest in Primoris. Have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.